Riverstone seeks bonus OK from bankruptcy court

Published: March 15, 2006

Riverstone Networks, in the midst of a bankruptcy sale to Lucent Technologies, wants to give out performance bonusesof $1 million and more to the company’s top executives, plus another $5 million in bonuses to key employees, according to filings made last week in U.S. Bankruptcy Court in Delaware.
The continuation of the bonus program is urgently required to “maintain the morale” of the company, according to attorneys representing the former firm, one of the two largest spinoff companies of the former Cabletron Systems. Riverstone has formerly based in Rochester but has for years been based in Santa Clara, Calif.
Riverstone is proposing that the court rule on the bonuses on March 23, the same day it is suppose to rule on the hearing on the sale, at which presumably the bid winner - be it Lucent or another company - will be announced.
The bankruptcy court trustee and dissident shareholder Charles Grimes have filed objections to the bonus program, primarily arguing that there was no urgent need to approve the bonuses before the bidding process is complete.
Despite the rush to give out performance bonuses, the company’s performance has suffered since it left Cabletron in 2001.
The U.S. Securities and Exchange Commission has investigated the accounting practices of the company, which has never made a profit, never filed any accurate financial statements, spent most of its cash and laid off most of its workers.
The SEC halted trading in Riverstone stock shortly after it filed for bankruptcy in February. It last traded at $1.06 per share, less than a tenth the price it was trading for at the time of the spinoff.
The company’s financial troubles have sparked dissatisfaction among numerous investors.
Grimes and other dissident shareholders got a Delaware state court to order the firm’s first shareholders’ meeting in three years. The meeting was held March 7, and while its results are not official yet, several sources said that shareholders re-elected the company’s current board of directors.
However, the bankruptcy court has approved approve an Official Committee of Equity Shareholders, acknowledging that current management interests do not always coincide with the interests of investors. The committee held its first meeting March 8, eight days before buyout bids are due.
The bankruptcy hearing is proceeding at an accelerated pace because Lucent has insisted on it. Grimes and others have tried to slow the process down, arguing that bidders need more time to make competing offers.
Riverstone’s attorneys argue that they already went through a quiet bidding process, with numerous expression of interest. Most potential bidders have already “kicked the tires,” and Lucent’s $170 million “bird in hand” offer for the company’s assets is better than any possible offers that may never come, attorneys argued before Bankruptcy Judge Christopher Sontchi.
Under that offer, the shareholders would get more than $1 per share -- nearly double the price shortly before bankruptcy was declared.
Under cross-examination, Noah Mesel, the company’s corporate counsel and senior vice president, did reveal that another bidder, whose name he did not disclose in open court, had offered $220 million minus a hold-back of 10 percent to indemnify it against various claims for 18 months. The company eventually dropped its bid.
Grimes’ attorney argued that that even if Lucent pulls out because bankruptcy procedures dragged on beyond the agreed-upon deadline, there would be other bidders in the wings, and shareholders might receive a better price.
The top bonuses - up to $1.5 million - would go to 15 top executives under the company’s current bonus program. These bonuses, based on performance, would have to be approved by the board.
Another $4.3 million in bonuses - also part of the company’s existing program - would go to some 160 key employees based on the time they put in and their performance. In addition, Riverstone is asking the court’s permission to grant up to $750,000 to retain non-insider employees during the bankruptcy sale.
In addition, the company wanted to make sure that its employees would be able to cash in their personal time off with their last paycheck.
The trustee argued that there was no emergency.
“It is highly unlikely that a mass exodus of employees will ensue” if the bonus policy was not endorsed by March 23.
It also was not a good idea to give out bonuses when Riverstone has yet to file some of the basic financial data that usually accompanies a bankruptcy filing, the trustee argued. - BOB SANDERS

This article appears in the March 3 2006 issue of New Hampshire Business Review